The global economic slump threatened to deteriorate as Japan, the world's second largest economy, shrank 0.8% for the quarter ending in June.

A decline in exports, company investments and public works spending pushed Japan closer to recession, defined as two successive quarters of economic decline. Japan managed to grow 0.1%. in the January-March quarter, so strictly speaking is not in recession yet. But its enfeebled state augurs ill for the world economy at a time when growth has stalled in the US and western Europe. It is the first time since the mid-1970s that all three pillars of the world economy are wobbling.

Meanwhile, questions abound over the ability of the new Japanese prime minister, Junichiro Koizumi, to enact quickly enough reforms to revive the economy. The Bush administration is pressing Japan to stick to reform proposals that include cleaning up massive bank debts and privatising the public sector. For his part, the hugely popular Mr Koizumi has promised more pain for ordinary Japanese before things get better.

Japan has been blighted by a slowdown that has dragged out for more than 10 years. The country eked out growth while slipping into recession in 1992, 1993 and 1999, but looks as if it is sinking into another recession. Big companies such as Hitachi and Fujitsu have announced massive job cuts in the face of falling sales and profits.

Unemployment hit 5% in July, a record high since the government began keeping such data in 1953. Shortly after the release of today's economic figures, Mr Koizumi gave the green light for preparing a supplementary budget in an attempt to rescue the economy.

Achieving growth for the fiscal year ending in March 2002 will be extremely difficult, Heizo Takenaka, the economy minister, acknowledged. "The figures confirm our economy is in a serious state," he said.

Friday's economic news sent Tokyo share prices plunging. The benchmark 225-issue Nikkei closed at 10,516 points, down 1.25% from Thursday. The Nikkei managed to stay above the 17-year-low close reached Monday of 10,409.